The Globalization Backlash Is Reverberating Through Boardrooms

Evidence of de-globalization — think Brexit and other attacks on international interdependence — is everywhere. This has significant and far-reaching implications for corporate decision making.

Boards of directors of global corporations will increasingly face strategic choices and capital allocation decisions framed by mounting geo-political risks. Three trends characterize the environment within which global businesses must contend: rising trade protectionism and a concomitant fall in global trade volumes, declining cross border capital flows, and mounting regulatory requirements. As a practical matter, for example, these changes in the global policy regime are forcing multinational corporations to scale back and sell parts of their international operations.

Meanwhile the Institute of International Finance forecasted net capital flows for emerging markets in 2015 would be negative for the first time since 1988. While international lending, as measured by cross-border banking claims at the Bank for International Settlements, has declined $2.6 trillion, or 9%, over the past two years, and at just $646 billion, foreign direct investment in rich economies last year represented a 40% drop from the peak before the financial crisis. Tighter regulation, for example in the form of greater capital and liquidity requirements imposed on banks and global financial institutions, limit credit precisely when companies with a global footprint need access to capital and thus exacerbate the challenging slow and low economic growth trajectory in which many business will likely struggle to operate.

Each of these shifts have consequences for how today’s multinational corporations should manage themselves. At a minimum, boards need to better understand the fundamentally changing economic and geopolitical environment — matters such as license-to-trade considerations, the risk of expropriation, inconsistent policymaking (when a policy instituted today—say a tax rate regime—is reversed tomorrow), and protectionist leanings that will impact where, how, and whether companies can successfully and competitively sell goods and services across borders. In each of these scenarios, a corporation can suffer substantial losses on capital investments made in good faith under a very different policy regime.

These macro changes also will affect how corporations will fund themselves. Specifically, boards will have to figure out how to navigate mounting financial challenges and funding questions when facing higher capital controls that could limit the ability to pay shareholders across borders. Furthermore, there will be new complexities in managing the balance sheet and navigating wider financing decisions; particularly as the “carry trade” (the strategy of borrowing at low interest rates in developed countries and investing in higher yielding emerging markets), becomes less attractive. Moreover, as the carry trade, which assumes that capital can move freely across borders, is replaced by more siloed, and more regionally-focused financial institutions, investment capital will have to be raised, secured, and returned to shareholders in ways that are more local, and less global.

Trans-border social considerations are also more challenging and urgent as businesses reexamine their international footprint and in some cases, decide to scale back their global operations in the face of the evolving and more stringent policy and regulatory backdrop. Even so, on-going liabilities for international staff facing retrenchment, decommissioning of international operations, environmental obligations, and tax and regulatory liabilities can expose a business to longer-term cash outlays and geopolitical risks well beyond shutting down operations. All of which require a deft handling of intercultural sensitivities.

This year, for example, the U.S. government’s Committee for Foreign Investment blocked a $3.3 billion transaction for Phillips to offload their lighting components division to Asian buyers on security grounds. And in 2014, Pfizer, the U.S. pharmaceutical company, had to abandon its $106 billion attempt to buy British drug maker AstraZeneca in the face of opposition from UK politicians. At the time, British Prime Minister David Cameron stated that he would require further commitments from Pfizer to protect UK jobs, and signaled that the bid would likely be subject to a “public interest test” (enabling ministers to intervene in a deal) before approving a takeover of the Britain’s drugs group. These examples show that national security and political decisions can override purely business and market valuation considerations, which in turn can alter a company’s strategic plans.

While it is true that over the years, issues traditionally classified as social, such as the threat technology poses to jobs, worsening income inequality, and environmental concerns have increasingly been subsumed into the board room thinking and decisions. But the latest global economic and political shifts demand that boards place an even greater premium on experience and knowledge of subjects that traditionally have been the domain of public policy, such as human rights, social contracts, utility of the local political class, and constraints and options of public policymakers—factors that can increasingly scupper board and management plans.

Dambisa Moyo is an international economist who serves on the boards of Barclays Bank, Chevron, Barrick Gold, and Seagate Technology.